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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 28, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File number 333-376-17
DELTA MILLS, INC.
-------------------
(Exact name of registrant as specified in its charter)
DELAWARE 13-2677657
- -------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
P.O. Box 6126 100 Augusta Street
Greenville, South Carolina 29606
------------------------------------------------ -------------
(Address of principal executive offices) (Zip Code)
864 255-4122
------------
(Registrant's telephone number, including area code)
(Not Applicable)
----------------
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ].
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. Common Stock, $.01 Par Value--
100 shares as of February 11, 2003.
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS H(1)(a)
AND H(1)(b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH THE REDUCED
DISCLOSURE FORMAT.
DELTA MILLS, INC.
INDEX
PART I. FINANCIAL INFORMATION
Page
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets--December 28, 2002 and June 29, 2002 3
Condensed consolidated statements of operations--
Three and six months ended December 28, 2002 and December 29, 2001 4
Condensed consolidated statements of cash flows--
Six months ended December 28, 2002 and December 29, 2001 5
Notes to condensed consolidated financial statements--December 28, 2002 6-8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8-11
Item 3. Quantitative and Qualitative Disclosures about Market Risk 12
Item 4. Controls and Procedures 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities and use of Proceeds 13
Item 3. Defaults upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 13
CERTIFICATIONS 14-19
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
Delta Mills, Inc. (In Thousands, except share amounts) December 28, 2002 June 29, 2002
--------------------- ---------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 650 $ 52
Accounts receivable:
Factor and other 34,850 49,887
Less allowances for returns 28 32
---------------- ----------------
34,822 49,855
Inventories
Finished goods 6,714 7,085
Work in process 20,725 19,878
Raw materials and supplies 6,715 5,784
---------------- ----------------
34,154 32,747
Deferred income taxes 1,241 1,347
Other assets 469 25
---------------- ----------------
TOTAL CURRENT ASSETS 71,336 84,026
Assets held for sale 3,141 3,141
PROPERTY, PLANT AND EQUIPMENT, at cost 148,659 147,906
Less accumulated depreciation 79,777 77,405
---------------- ----------------
68,882 70,501
DEFERRED LOAN COSTS AND OTHER ASSETS 702 769
---------------- ----------------
$ 144,061 $ 158,437
================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Trade accounts payable $ 6,819 $ 11,689
Revolver 3,938 11,365
Payable to Affiliates 3,480 3,321
Accrued employee compensation 923 1,696
Accrued and sundry liabilities 18,752 18,621
---------------- ----------------
TOTAL CURRENT LIABILITIES 33,912 46,692
LONG-TERM DEBT 44,739 47,819
DEFERRED INCOME TAXES 9,184 9,340
DEFERRED COMPENSATION 7,182 7,267
SHAREHOLDERS' EQUITY
Common Stock -- par value $.01 a share -- authorized
3,000 shares, issued and outstanding 100 shares
Additional paid-in capital 51,792 51,792
Retained earnings(deficit) (2,748) (4,473)
---------------- ----------------
49,044 47,319
COMMITMENTS AND CONTINGENCIES
---------------- ----------------
$ 144,061 $ 158,437
================ ================
See notes to consolidated financial statements.
3
CONSOLIDATED STATEMENTS OF OPERATIONS
Delta Mills Inc.
(In Thousands)
3 Mths Ended 3 Mths Ended 6 Mths Ended 6 Mths Ended
December 28, December 29, December 28, December 29,
2002 2001 2002 2001
----------------- ---------------- ---------------- -----------------
Net sales $ 35,853 $ 44,140 $ 82,032 $ 81,117
Cost of goods sold 32,158 42,432 72,792 78,330
----------------- ---------------- ---------------- -----------------
Gross profit 3,695 1,708 9,240 2,787
Selling, general and administrative expenses 2,566 2,871 5,461 5,463
Impairment and restructuring expenses 8,683
Other income 23 18 488 31
----------------- ---------------- ---------------- -----------------
OPERATING PROFIT (LOSS) 1,152 (1,145) 4,267 (11,328)
Other (expense) income:
Interest expense (1,240) (2,544) (2,771) (4,999)
Interest income 36 133
Gain on extinguishment of debt 565 1,303
----------------- ---------------- ---------------- -----------------
(675) (2,508) (1,468) (4,866)
----------------- ---------------- ---------------- -----------------
INCOME(LOSS) BEFORE INCOME TAXES 477 (3,653) 2,799 (16,194)
Income tax expense (benefit) 184 (1,251) 1,074 (5,639)
----------------- ---------------- ---------------- -----------------
NET INCOME (LOSS) $ 293 $ (2,402) $ 1,725 $ (10,555)
================= ================ ================ =================
See notes to consolidated financial statements.
4
CONSOLIDATED STATEMENTS OF CASH FLOWS
Delta Mills Inc.
(In Thousands)
6 Months Ended 6 Months Ended
December 28, December 29,
2002 2001
-------------------- --------------------
OPERATING ACTIVITIES
Net income (loss) $ 1,725 $ (10,555)
Adjustments to reconcile net income(loss) to net
cash provided by operating activities:
Depreciation 4,578 4,551
Amortization 68 211
Gain on extiguishment of debt (1,303)
Provision for impairment and restructuring 8,683
Change in deferred income taxes (50) (5,811)
Losses (gains) on disposition of property
and equipment (433)
Deferred compensation (86) 367
Changes in operating assets and liabilities 7,832 3,726
-------------------- --------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 12,331 1,172
INVESTING ACTIVITIES
Property, plant and equipment:
Purchases (3,302) (2,674)
Proceeds of dispositions 775
-------------------- --------------------
NET CASH USED BY INVESTING ACTIVITIES (2,527) (2,674)
FINANCING ACTIVITIES
Proceeds from revolving lines of credit 88,752
Repayments on revolving lines of credit (96,180)
Repurchase and retirement of long term debt (1,778)
-------------------- --------------------
NET CASH USED BY FINANCING ACTIVITIES (9,206) 0
-------------------- --------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 598 (1,502)
Cash and cash equivalents at beginning of year 52 11,715
-------------------- --------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 650 $ 10,213
==================== ====================
See notes to consolidated financial statements.
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE A--BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial statements of Delta
Mills, Inc. ("the Company") have been prepared in accordance with accounting
principles generally accepted in the United States of America for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States of America for complete financial statements. In the opinion of
management, all adjustments consisting of only normal recurring accruals
considered necessary for a fair presentation have been included. Operating
results for the six months ended December 28, 2002 are not necessarily
indicative of the results that may be expected for the year ending June 28,
2003. For further information, refer to the consolidated financial statements
and footnotes thereto included in the Company's annual report on Form 10-K for
the year ended June 29, 2002.
NOTE B--SUMMARIZED FINANCIAL INFORMATION OF SUBSIDIARY
Delta Mills Marketing, Inc. (the "Guarantor") is a wholly-owned subsidiary of
the Company and has fully and unconditionally guaranteed (the "Guarantee") the
Company's payment of principal, premium, if any, interest and certain liquidated
damages, if any, on the Company's Senior Notes. The Guarantor's liability under
the Guarantee is limited to such amount, the payment of which would not have
left the Guarantor insolvent or with unreasonably small capital at the time its
Guarantee was entered into, after giving effect to the incurrence of existing
indebtedness immediately prior to such time.
The Guarantor is the sole subsidiary of the Company and does not comprise a
material portion of the Company's assets or operations. All future subsidiaries
of the Company will provide guarantees identical to the one described in the
preceding paragraph unless such future subsidiaries are Receivables Subsidiaries
(as defined in the indenture relating to the Notes). Such additional guarantees
will be joint and several with the Guarantee of the Guarantor.
The Company has not presented separate financial statements or other disclosures
concerning the Guarantor because Company management has determined that such
information is not material to investors.
Summarized financial information for the Guarantor is as follows (in thousands):
December 28, 2002 June 29, 2002
----------------- -------------
Current assets $ 61 $ 33
Noncurrent assets 59 61
Current Liabilities 2,138 1,902
Noncurrent liabilities 856 978
Stockholders' deficit ($2,874) ($2,786)
Summarized results of operations for the Guarantor are as follows (in
thousands):
Six Months Ended
--------------------------------------
December 28, 2002 December 29, 2001
----------------- -----------------
Net sales - intercompany commissions $ 1,842 $ 1,306
Cost and expenses 1,930 1,962
Loss from continuing operations (88) (656)
Net loss (88) (656)
6
NOTE C-LONG-TERM DEBT, CREDIT ARRANGEMENTS, AND NOTES PAYABLE
On August 25, 1997 the Company issued $150 million of unsecured ten-year Senior
Notes at an interest rate of 9.625%. These notes will mature in August 2007. At
December 28, 2002, the outstanding balance of the notes was $44,739,000, a
decrease of $3,080,000 from the balance at June 29, 2002.
Delta Mills has a secured $50 million revolving credit facility that expires on
March 31, 2004. Borrowings under this credit facility are based on eligible
accounts receivable and inventory of the Company, subject to a maximum $37.5
million availability limit. The facility is secured by the accounts receivable,
inventory and capital stock of the Company. The interest rate on the credit
facility is based on a spread over either LIBOR or a base rate. Borrowings under
this facility were $3.9 million and $11.4 million as of December 28, 2002 and
June 29, 2002, respectively.
The Delta Mills' credit facility contains restrictive covenants that restrict
additional indebtedness, dividends, and capital expenditures, and includes a
minimum availability requirement. The payment of dividends with respect to Delta
Mills, Inc. stock is permitted if there is no event of default and there is at
least $1 of availability under the facility. During the six months ended
December 28, 2002 and the year ended June 29, 2002, Delta Mills did not pay any
dividends to Delta Woodside Industries, Inc. Under the minimum availability
requirement, Delta Mills' availability for borrowings cannot exceed $37.5
million. The revolver availability was approximately $21 million at December 28,
2002. Management believes the availability under Delta Mills' credit facility is
adequate for the foreseeable future.
The Company assigns a substantial portion of its trade accounts receivable to
GMAC Commercial Credit LLC (the Factor) under a factor agreement. The assignment
of these receivables is primarily without recourse, provided that customer
orders are approved by the Factor prior to shipment of goods, up to a maximum
for each individual account. The assigned trade accounts receivable are recorded
on the Company's books at full value and represent amounts due the Company from
the Factor. There are no advances from the Factor against the assigned
receivables. All factoring fees are recorded on the Company's books as incurred
as a part of General and Administrative Expense.
NOTE D - RESTRUCTURING AND IMPAIRMENT CHARGES
During the year ended June 29, 2002, the Company took an impairment and
restructuring charge of $8.7 million, on a pretax basis, associated with the
closing of the Furman Plant as announced on August 22, 2001. Pursuant to SFAS
121, "Accounting for the Impairment of Long-Lived Assets to be Disposed Of", the
Company recorded an $8.2 million non-cash asset write-down to reflect the
property and equipment at the Furman Plant at its estimated fair value, less
selling costs. The carrying amount of these assets was reduced to approximately
$3,923,000. The balance of the charge was approximately $0.5 million of accrued
expenses for involuntary termination costs associated with the 122 employees
terminated as a result of the plant closing. Production at the Furman facility
ceased on October 21, 2001 and the Company is in the process of either
liquidating or transferring the assets associated with this facility.
As of December 28, 2002 and June 29, 2002 the Company had $3.1 million in assets
held for sale related to the closing of the Furman plant.
7
NOTE E - GAIN ON EXTINGUISHMENT OF DEBT
In April 2002, the FASB issued Statement No. 145, "Rescission of FASB Statements
Nos. 4 and 64, Amendment of FASB Statement No. 13, and Technical Corrections".
Among other things, Statement No. 145, through the rescission of Statement No.
4, will no longer require extraordinary item treatment for gains and losses from
the extinguishment of debt, unless the debt extinguishment meets the unusual in
nature and infrequency of occurrence criteria established in APB 30. The
Statement was effective for fiscal years beginning after May 15, 2002 and
requires the reclassification of prior period items that do not meet the
extraordinary item classification criteria in APB 30. Upon adoption, the Company
reclassified all extraordinary gains recognized for the early extinguishment of
debt as a component of income before income taxes for all financial statement
periods presented. During the quarter ended December 28, 2002, the Company
purchased $1,527,000 face amount of its 9.625% Senior Notes for $962,000. The
Company recognized a gain of $565,000 as a result of this purchase, which is
included in income before income taxes in the accompanying statement of
operations. For the six months ended December 28, 2002, the Company purchased
$3,080,000 face amount of its 9.625% Senior Notes for $1,777,000. The Company
recognized a gain of $1,303,000 as a result of these purchases, which is also
included in income before income taxes in the accompanying statement of
operations.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion contains certain "forward-looking statements". All
statements, other than statements of historical fact, that address activities,
events or developments that the Company expects or anticipates will or may occur
in the future, including such matters as future revenues, future cost savings,
future capital expenditures, business strategy, competitive strengths, goals,
plans, references to future success and other such information are
forward-looking statements. The words "estimate", "project", "anticipate",
"expect", "intend", "believe" and similar expressions are intended to identify
forward-looking statements.
The forward-looking statements in this Quarterly Report are based on the
Company's expectations and are subject to a number of business risks and
uncertainties, any of which could cause actual results to differ materially from
those set forth in or implied by the forward-looking statements. These risks and
uncertainties include, among others, changes in the retail demand for apparel
products, the cost of raw materials, competitive conditions in the apparel and
textile industries, the relative strength of the United States dollar as against
other currencies, changes in United States trade regulations and the discovery
of unknown conditions (such as with respect to environmental matters and similar
items). The Company does not undertake publicly to update or revise the
forward-looking statements even if it becomes clear that any projected results
will not be realized.
Delta Mills, Inc. ("the Company") sells a broad range of woven, finished apparel
fabric primarily to branded apparel manufactures and resellers. The Company also
sells camouflage fabric and other fabrics used in apparel sold to the United
States Department of Defense.
Net sales for the three months ended December 28, 2002 were $35.9 million as
compared to $44.1 million in the same quarter of the prior fiscal year, a
decrease of 18.8%. The sales decrease was primarily in units and was somewhat
offset by a slight increase in average sales price. The sales unit decline was
due to a decline in market demand. Net sales for the six months ended December
28, 2002 were $82.0 million consistent with net sales of $81.1 million for the
six months ended December 29, 2001. The overall average sales price increased
approximately 2% in the current quarter and the six months ended December 28,
2002 as compared to the same periods in the prior year. This increase in sales
price was principally due to a shift in mix to higher price product categories.
Gross profit was $3.7 million and 10.3% of sales for the second quarter of
fiscal year 2003. This compares to gross profit of $1.7 million and 3.9% of
sales in the prior year second quarter. Gross profit for the six months ended
December 28, 2002 was $9.2 million or 11.3% of sales compared to gross profit of
$2.8 million or 3.4% of sales for the six months ended December 29, 2001. In
both the current quarter and the six months ended December 28, 2002, the
improvement in gross profit was the result of lower product costs and a shift in
product categories to products that yield higher profit margins.
8
Selling, general and administrative expense (SG&A) was $2.6 million and 7.2% of
net sales for the second quarter of fiscal year 2003 compared to SG&A of $2.9
million and 6.5% of net sales for the prior year second quarter. The decline in
SG&A dollars was primarily due to a decline in administrative overhead costs
during the current quarter. SG&A expenses for the six months ended December 28,
2002 and December 29, 2001 were $5.5 million or 6.7% of net sales.
The Company reported operating profit of $1.2 million in the current year second
quarter compared to an operating loss of $1.1 million in the second quarter of
fiscal 2002. For the six months ended December 28, 2002, the company reported
operating profit of $4.3 million versus a loss of $11.3 million for the six
months ended December 29, 2001. The operating loss for the previous year
included impairment and restructuring charges of $8.7 million related to the
closing of the Company's Furman facility. Excluding the impairment and
restructuring charge during the first six months of fiscal year 2002, the
improvement in operating profit was primarily due to the improvement in gross
profit as discussed above.
Interest expense was $1.2 million for the quarter ended December 28, 2002,
compared to $2.5 million for the prior year quarter. Interest expense for the
six months ended December 28, 2002 was $2.8 million versus $5.0 million for the
six months ended December 29, 2001. The reduction in interest expense was
primarily due to the reduction in the balance of the Senior Notes. There was no
significant interest income in either the current or prior year quarters.
Included in other (expense) income for the quarter ended December 28, 2002 was a
$0.6 million gain resulting from the repurchase by the Company of a portion of
its 9.625% Senior Notes. Included in other (expense) income for the six months
ended December 28, 2002 was a $1.3 million gain also resulting from Senior Notes
repurchases. There was no similar income or expense reported in this category in
the previous year quarter or six months ending December 29, 2001.
The income tax expense for the quarter was $184,000. This compares to an income
tax benefit of $1.3 million in the previous year quarter. For the six months
ended December 28, 2002 income tax expense was $1.1 million versus a tax benefit
of $5.6 million for the six months ended December 29, 2001. The effective tax
rate for the three months and six months ended December 28, 2002 was 38.5%.
The Company reported net income of $293,000 for the quarter ended December 28,
2002 compared to a net loss of $2.4 million for the quarter ended December 29,
2001. Net income for the current year quarter included a gain of $0.3 million on
an after tax basis from the repurchase by the Company of a portion of its 9.625%
Senior Notes. Net income for the six months ended December 28, 2002 was $1.7
million compared to a net loss of $10.6 million for the previous year's six
months ending December 29, 2001. Net income for the current six month period
included a gain of $0.8 million on an after tax basis from the repurchase by the
Company of a portion of its 9.625% Senior Notes. The net loss for the six months
ended December 29, 2001 included asset impairment and restructuring costs
associated with closed facilities of $5.6 million on an after tax basis.
For the current year to date, the Company generated $13.1 million and used $12.5
million in cash for a net increase in cash of $0.6 million. Cash generated from
operations was $12.3 million. The Company also generated $0.8 million in cash
from various machinery and equipment sales. Cash uses for the current year to
date were $3.3 million for capital expenditures, $1.8 million for the repurchase
of Senior Notes, and $7.4 million for revolver debt reduction. The Company
believes that the cash flow generated by its operations combined with the
availability on its revolving credit facility will be sufficient to service its
debt, to satisfy its day to day working capital requirements and to fund its
planned capital expenditures.
On November 6, 2002, the Company announced that it had started a major capital
project to modernize its Delta 3 cotton finishing plant in Wallace SC. The
Company expects that the first phase of this project will be complete by June of
2003. During fiscal years 2004 and 2005, the Company plans additional capital
expenditures for this project to make the finishing facility better prepared for
growth and improved product quality.
9
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
On August 25, 1997 Delta Mills issued $150 million of unsecured ten-year Senior
Notes at an interest rate of 9.625%. These notes will mature in August 2007. At
December 28, 2002, the outstanding balance of the notes was $44,739,000, a
decrease of $3,080,000 from the balance at June 29, 2002.
Delta Mills has a secured $50 million revolving credit facility that expires on
March 31, 2004. Borrowings under this credit facility are based on eligible
accounts receivable and inventory of Delta Mills, subject to a maximum $37.5
million availability limit. The facility is secured by the accounts receivable,
inventory and capital stock of Delta Mills. The interest rate on the credit
facility is based on a spread over either LIBOR or a base rate. Borrowings under
this facility were $3.9 million and $11.4 million as of December 28, 2002 and
June 29, 2002, respectively.
The Delta Mills' credit facility contains restrictive covenants that restrict
additional indebtedness, dividends, and capital expenditures, and includes a
minimum availability requirement. The payment of dividends with respect to Delta
Mills, Inc. stock is permitted if there is no event of default and there is at
least $1 of availability under the facility. During the quarter ended December
28, 2002 and the year ended June 29, 2002, Delta Mills did not pay any dividends
to Delta Woodside Industries, Inc. Under the minimum availability requirement,
Delta Mills' availability for borrowings cannot exceed $37.5 million. The
revolver availability was approximately $21 million at December 28, 2002.
Management believes the availability under Delta Mills' credit facility is
adequate for the foreseeable future.
In August of 2001, the FASB issued SFAS 143, "Accounting for Asset Retirement
Obligations". SFAS 143 requires an enterprise to record the fair value of an
asset retirement obligation as a liability in the period in which it incurs a
legal obligation associated with the retirement of tangible long-lived assets,
which assets result from the acquisition, construction, development and or
normal use of the assets. The enterprise also is to record a corresponding
increase to the carrying amount of the related long-lived asset (i.e. the
associated asset retirement costs) and to depreciate that cost over the life of
the asset. The liability is changed at the end of each period to reflect the
passage of time (i.e. accretion expense) and changes in the estimated future
cash flows underlying the initial fair value measurement. This statement is
effective for fiscal years beginning after June 15, 2002. The Company has
adopted the Statement effective for fiscal 2003. The adoption of this standard
has not materially impacted the Company.
On October 3, 2001 the FASB issued statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" that is applicable to financial
statements issued for fiscal years beginning after December 15, 2001. The FASB's
new rules on asset impairment supersede FASB statement No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of", and provide a single accounting model for long-lived assets to be disposed
of. The Company has adopted the Statement effective for fiscal 2003. The
adoption of this standard has not materially impacted the Company.
In April 2002, the FASB issued Statement No. 145, "Rescission of FASB Statements
Nos. 4 and 64, Amendment of FASB Statement No. 13, and Technical Corrections".
Among other things, Statement No. 145, through the rescission of Statement No.
4, will no longer require extraordinary item treatment for gains and losses from
the extinguishment of debt, unless the debt extinguishment meets the unusual in
nature and infrequency of occurrence criteria established in APB 30. The
Statement was effective for fiscal years beginning after May 15, 2002 and
requires the reclassification of prior period items that do not meet the
extraordinary item classification criteria in APB 30. Upon adoption, the Company
reclassified all extraordinary gains recognized for the early extinguishment of
debt as a component of income before income taxes for all financial statement
periods presented.
10
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
In July 2002, the FASB issued Statement No. 146, "Accounting for Obligations
Associated with Disposal Activities". Statement No. 146 addresses financial
reporting and accounting for costs associated with exit or disposal activities.
It nullifies EITF Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)". Statement 146 requires that a liability be
recognized for such costs only when the liability is incurred, which is in
contrast to EITF No. 94-3, which requires the recognition of a liability upon
the commitment to an exit plan. The Statement is effective for exit or disposal
activities that are initiated after December 31, 2002. The Company believes the
adoption of Statement No. 146 will not have a material impact on its financial
statements.
During 1998, the Company received notices from the State of North Carolina
asserting deficiencies in state corporate income and franchise taxes for the
Company's 1994 - 1997 tax years. The total assessment proposed by the State
amounts to $1.5 million, which includes interest and penalties. The assessment
was delayed pending an administrative review of the case by the State. In
October 2002, the State proposed a settlement in which the Company would have
paid approximately 90% of the assessed amount plus a portion of certain
penalties for the Company's tax years 1994 - 2000. The Company rejected this
offer and continued with its appeal due to management's belief that the State's
legal position is in conflict with established principles of federal
constitutional law. The Company believes that its reserves for any likely
settlement are adequate and any payment in settlement of this matter will not
result in a material impact on the Company's results of operations.
CRITICAL ACCOUNTING POLICIES
Critical accounting policies are defined as those that are reflective of
significant judgements and uncertainties, and potentially result in materially
different results under different assumptions and conditions.
Impairment of Long - Lived Assets: When required by circumstances, the Company
evaluates the recoverability of its long - lived assets by comparing estimated
future undiscounted cash flows with the asset's carrying amount to determine if
a write - down to fair value is required.
Income Taxes: Deferred income taxes are recognized for the tax consequences of
"temporary differences" by applying enacted statutory tax rates applicable to
future years to differences between the financial statement carrying amounts and
the tax bases of existing assets and liabilities. The effect on deferred taxes
of a change in tax rates is recognized in income in the period that includes the
enactment date. At December 28, 2002, the Company had regular tax loss carry
forwards of $35 million for federal purposes and $10 million for state purposes.
The Federal loss carry forwards expire at various intervals from 2013 to 2021,
while the state loss carry forwards expire at various intervals beginning in
2003. At December 28, 2002, the Company's gross deferred tax assets are reduced
by a valuation allowance of $156,000 due to expiring tax credits. It is
management's belief that it is more likely than not that the gross deferred tax
assets will be realized in the future. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. The potential
tax effect of establishing a full valuation allowance on gross deferred tax
assets is approximately $13 million.
11
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Commodity Risk Sensitivity
As a part of the Company's business of converting fiber to finished fabric, the
Company makes raw cotton purchase commitments and then fixes prices with cotton
merchants who buy from producers and sell to textile manufacturers. Daily price
fluctuations are minimal, yet long-term trends in price movement can result in
unfavorable pricing of cotton. Before fixing prices, the Company looks at supply
and demand fundamentals, recent price trends and other factors that affect
cotton prices. The Company also reviews the backlog of orders from customers as
well as the level of fixed price cotton commitments in the industry in general.
As of December 28, 2002, a 10% decline in market price of the Company's fixed
price contracts would have had a negative impact of approximately $0.7 million
on the value of the contracts. As of June 29, 2002, such a 10% decline would
have had a negative impact of $1.5 million. The decline in the potential
negative impact from June 29, 2002 to December 28, 2002 is due principally to a
decline in the quantity of cotton with fixed prices as compared to the previous
period.
Interest Rate Sensitivity
The $50 million secured four-year revolving credit facility expiring in 2004 is
sensitive to changes in interest rates. Interest is based on a spread over LIBOR
or a base rate. An interest rate increase would have a negative impact to the
extent the Company borrows against the revolving credit facility. The impact
would be dependent on the level of borrowings incurred. As of December 28, 2002,
an increase in the interest rate of 1% would have a negative impact of
approximately $39,400. As of June 29, 2002, an increase in the interest rate of
1% would have had a negative impact of approximately $114,000. The decline in
the potential negative impact from June 29, 2002 to December 28, 2002 is due to
the decrease in borrowings from the facility.
An interest rate change would not have an impact on the payments due under the
fixed rate ten year Senior Notes.
Item 4. CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management, including
the Chief Executive Officer and Chief Financial Officer, we have evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures within 90 days of the filing date of this quarterly report, and,
based on their evaluation, our Chief Executive Officer and Chief Financial
Officer have concluded that these controls and procedures are effective. There
were no significant changes in our internal controls or in other factors that
could significantly affect these controls subsequent to the date of their
evaluation.
Disclosure controls and procedures are our controls and other procedures that
are designed to ensure that information required to be disclosed by us in the
reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the Securities and
Exchange Commission's rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed by us in the reports that we file or submit
under the Exchange Act is accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial Officer, as
appropriate to allow timely decisions regarding required disclosure.
12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings *
Item 2. Changes in Securities and Use of Proceeds*
Item 3. Defaults upon Senior Securities*
Item 4. Submission of Matters to a Vote of Security Holders*
Item 5. Other Information*
Item 6. Exhibits and Reports on Form 8-K
a) Listing of Exhibits
99.1 Certificate Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
signed by William F. Garrett, dated February 11, 2003.
99.2 Certificate Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
signed by William H. Hardman, dated February 11, 2003.
b) No report on Form 8-K was filed during the fiscal quarter ended
December 28, 2002.
* Items 1,2,3,4 and 5 are not applicable.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Delta Mills, Inc.
--------------------------
(Registrant)
Date February 11, 2003 By:/s/ W.H. Hardman, Jr.
--------------------------- -------------------------------
W.H. Hardman, Jr.
Chief Financial Officer
13
CERTIFICATIONS
I, William F. Garrett, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Delta Mills,
Inc;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report ("the Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
fulfilling the equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date February 11, 2003 By: /s/ William F. Garrett
---------------------------- --------------------------------
William F. Garrett
President & Chief Executive Officer
I, William H. Hardman, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Delta Mills, Inc;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report ("the Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
fulfilling the equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date February 11, 2003 By: /s/ W. H. Hardman, Jr.
--------------------------- -------------------------------
W.H. Hardman, Jr.
Chief Financial Officer